The Dollar's Triangle Breakdown

10/05/04 11:42:19 AM

by David Penn

If you found yourself missing the glory days of greenback gloom and doom, then have I got a symmetrical triangle for YOU!

Security: DX
Position: N/A

As the last dollar bull in the US, I recently wrote suggesting that a positive divergence in the 7,10 stochastic might have been anticipating a bottom in greenback futures ("The Return Of How the Dollar Gets Its Groove Back," Traders.com Advantage, September 24, 2004).

In that article, I noted that even if the greenback made lower prices in October vis-a-vis September, there was a strong chance for a bottom as long as a new low in the 7,10 stochastic was not made. Unfortunately for the immediate-term case for a higher dollar, a lower low in the 7,10 stochastic did occur with the dollar's end-of-September decline.

Figure 1: A breakdown from this symmetrical triangle should send US dollar futures to a test of their year-to-date lows.

Graphic provided by: Prophet Financial Systems.

In the absence of an intermediate low in the September/October time frame, it is only prudent to start looking for a deeper decline. As such, there is really no significant support until we look to what might be called "the mother of all greenback support" at 85 (basis continuous futures). Dow theorist and cycles analyst Tim Wood has noted that this level could not be more key for the US dollar. Already flirting with lows not seen since the early to mid-1990s, there is literally no support for the dollar below about 80 (the 1991, 1992, and 1995 lows). Should the dollar enter this territory, it will truly enter uncharted waters, and those looking for doomsday-dollar scenarios might want to consider polishing their sandwich boards.

The symmetrical triangle in the greenback that has developed over the late summer and into the autumn doesn't necessarily point to such dire declines. What it does suggest, interestingly enough, is a correction that will test the year-to-date lows near 85. This is derived by taking the width of the triangle at its widest point -- a span of about 3 to 3.5 points -- and subtracting that amount from the value at the point of the breakdown from the triangle, or 88. This provides a downside target of 85 to 84.5, and a true test of the lows. Those dollar bulls who failed to find a bottom in October might find themselves with one more chance before we're all guesstimating in an effort to find out when the dollar's decline might really end.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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The Dollar's Triangle Breakdown

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